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September 14, 2010

Roger Gibson Speaks About Asset Allocation Now

Can two volatile asset classes reduce volatility in portfolios?

The man who wrote the book on asset allocation, Roger Gibson, founder and CIO of Gibson Capital, LLC, walked listeners through his current view on "Asset Allocation and the Role of Commodities," on U.S. Global Investors' webcast on September 9, with Frank Holmes, CEO and CIO of U.S. Global Investors.

U.S. Global Investors manages $2.6 billion in assets, as of June 30, for institutional and retail investors. Its family of mutual funds includes some that focus on natural resources and commodities.

During the economic crisis, Gibson says, his firm spent time with clients, discussing whether changes in their individual strategy were necessary. Gibson's firm developed a two-hour client session based on "behavioral psychology," to help clients understand their "risk tolerance," and a separate, two-hour session on investment "implications and goals." These meetings helped the clients to answer the question: "is your asset allocation correct?" If changes were needed, they could "look at it together" and make those changes. "Most clients in '08 didn't abandon their strategy," he noted, but, if there's another "dip...can they go through that again?"

Known for his strong belief in diversification, Gibson asserts that asset allocation among equities, fixed income, real estate and commodities, can, over a long term, provide better average compound returns--with lower volatility. Diversification provides the chance, he says, for the assets to behave with lower correlations to each other, under normal conditions. Though at times during the current crises, Gibson notes, correlations got much closer.

Gibson pointed out an error I made regarding the correlation between commodities and equities in the earlier version of this article. Here is the correct point as he explained it in an email: "As a result of the dissimilarity in the patterns of returns among the different asset classes, in the long run the portfolio achieves a higher risk-adjusted return than the weighted average returns of the asset classes in the portfolio."